Raising Russia’s Minimum Wage: A Band-Aid for the Poor

The minimum monthly wage in Russia [often referred to by its abbreviation, MROT] has been pegged to the subsistence minimum. This gift to employees will come into effect on May 1, 2018, when the minimum monthly wage will grow from the current ₽9,489 to ₽11,163 [approx. €160 at current exchange rates]. Regional minimum wages might be higher. For example, in Moscow, it will be set at ₽18,700 a month, while in Petersburg it will rise to ₽17,000. According to former federal deputy labor minister Pavel Kudyukin, the lowest paid category of workers will benefit from the rise in the minimum wage, but there will more losers.

The principle that the minimum monthly wage cannot be lower than the subsistence minimum was incorporated into the Russian Labor Code way back in 2001, with the proviso, however, it would be implemented gradually.

The fact this decision has been made amidst less than propitious economic circumstances is undoubtedly an election campaign gambit. Theoretically, it is a measure that had to be taken. Having a minimum monthly wage lower than the subsistence minimum, especially Russia’s subsistence minimum, is simply shameful. Some people will stand to gain from the decision, but fairly broad segments of the populace will also suffer serious losses. But the propagandists, of course, will talk about the gains, especially as we are in an election campaign.

Minimum Minimorum
The general opinion of nearly all social policy experts is that Russia’s subsistence minimum is equivalent to the poverty level. It will keep a person from starving to death, but it would be a great exaggeration to call it a means to a full-fledged, dignified life.

International standards are also quite modest, of course: the subsistence minimum is defined for the poorest countries. Naturally, the developed countries have their own notions of the subsistence minimum. It is an essential tool of social policy. Various welfare payments are pegged to it, and it determines the level at which households are seen to need additional assistance. It is measured in different ways. Measuring the subsistence minimum in terms of the consumer goods basket, as is done in Russia, is deemed quite an archaic method, although the US uses the same method to calculate it.

The question, of course, is how the contents of the consumer goods basket are decided. Russia does not fully take into account the needs of the modern individual. It bases its calculations on the assumption people have no need of such an important social benefit as housing. The costs of utilities are at least included in the basket, but the possibility of improving one’s living conditions are not. Cultural needs are very poorly represented. Most of the so-called non-product needs are calculated through an adjustment, as a percentage of the consumer basket given over to products. It is no wonder the subsistence minimum, as it is imagined in Russia, satisfies neither the experts nor ordinary people.

The subsistence minimum has also been reduced from time to time with reference to drops in prices. This has also provoked a slew of questions. How are prices determined? Inflation affects different income brackets in very different ways. The poorer people are, the greater their personal level of inflation. If the price for a Mercedes suddenly drops, it does not mean the price of sunflower seed oil will not go up.

There is an important brake on seriously expanding the subsistence minimum in Russia. When the number of poor people is between fifteen and twenty percent, you can provide them with supplemental financial assistance and benefits. If the percentage of poor people is fifty percent or greater, it is quite tricky for the state to do anything for them. When half of the populace is receiving poverty assistance payments, either the payments are utterly paltry and spread thin or the state simply cannot make them.

The Winners
For people who earn the least of all, pegging the mininum monthly wage to the subsistence minimum does constitute an increase in wages. It is a quite decent increase in some cases, especially if you consider the fact there are people in Russia—Deputy Prime Minister Olga Golodets has estimated there are nearly five million such people—who received a salary lower than the previous minimum monthly wage.

The workers who really have a chance to improve their lot are mainly those employed in the public sector in various auxiliary positions: maintenance personnel, cleaners, and so on. They will earn more.

The Losers
Formally, there will be winners, but there will be more losers. The rise in the minimum monthly wage will cause serious problems in the regions, since poor public sectorsworkers are usually paid from regional and municpal budgets. The new expenditures they incure will be only partly covered by transfers from the federal budget. Regional officials will once again have to optimize some things and lay off people. This is a quite significant aspect of the headache generated every time the parliament passes laws or the president signs decrees increasing payments to people who do not get them from the federal budget.

The rise in the monthly minimum wage will be a considerable problem for a number of businesses, especially small businesses. There is a risk it will expand the gray sector of the employment market. This is also an unpleasant consequence for workers, for when they are employed in the gray sector, payments to the Pension Fund are not deducted from their wages, and they lose pension payments they would have received in the future. People in Russia usually disregard this, because, one, they do not actually believe they will live until pension age, and two, they really do not believe the state will not think up more mischief by the time their pensions come due.

Another important question: what is included in the minimum monthly wage? Currently, there are several court rulings that the minimum monthly wage should not include any sort of compensatory pay, such as the northern hardship bonus. This pay must be disbursed over and above the minimum wage. These are sound rulings, but the problem is Russia does not have a precedents-based judicial system, and one court’s ruling is anything but obligatory for other courts. Every individual whose minimum monthly wage includes compensatory or incentive pay must file suit in court to have his or her wages individually recalculated. So, the problem is not only the amount of the minimum monthly wage and how it correlates with the subsistence minimum but also what is included in the minimum monthly wage.

A Band-Aid for the Poor
Increasing the minimum monthly wage cannot be implemented in isolation. It should be complemented by serious reforms in other areas. We must radically change our entire social and economic policy, including, as an obligatory part of such reforms, our taxation policy. It has not always been understood in Russia that there is no such thing as a welfare state* without progressive taxation. The introduction of progressive taxation, of course, will be an unpopular measure amongst a large number of people. Plus, given the inefficiency of the Russian state and the social irresponsibility of the rich, such an attempt would push the growth of the gray economy.

Poverty is not only a problem of social policy. It is not eliminated by paying people social benefits. We need a completely different economic policy that would give people the opportunity to work in well-paid jobs and thus make decent pension contributions. The problem of poverty is not solved merely by redistributing resources, although it is also necessary. Treating poverty with social benefits means treating the symptoms. Treating poverty with economic growth means treating the causes.

* According to Article 7 of the Russian Federal Constitution, the Russian Federation “is a social State whose policy is aimed at creating conditions for a worthy life and a free development of man [and where] the labour and health of people shall be protected, a guaranteed minimum wages and salaries shall be established, state support ensured to the family, maternity, paternity and childhood, to disabled persons and the elderly, the system of social services developed, state pensions, allowances and other social security guarantees shall be established.” For more on the practical implications of this constitutional guarantee in a quasi-populist kleptocratic tyranny, see Ilya Matveev, “The ‘Welfare’ State Doesn’t Get Any Better Than This,” Chtodelat News, October 12, 2012.